State Fiscal Outlook Bleak for 2015 and Beyond!

By January 8, 2015 Uncategorized

As we begin 2015, it’s a good time to pause and look at the “big picture” long-term prospects of state and local fiscal affairs. As tax professionals, we focus on the details of tax law but often fail to understand the environment in which these laws exist and the challenges that state legislators face to keep governments going.

The U.S. Government Accountability Office (GAO) recently released its 2014 state and local government fiscal outlook report. The report reveals some long-term systemic revenue and spending issues that will eventually impact our clients. The outlook is pretty grim! Here are just a few highlights from the GAO report:
1. Without immediate spending reductions and revenue increases, state governments will have significant budget strains for the next 50 years
2. Rising health-care costs for Medicaid and for employees/retirees is primary driver of the shortfall
3. Decline in income earned by state pension funds adds to unfunded balance. Current unfunded state pension balance is $4.7 Trillion!
4. Receipts from income tax and sales tax are set to decline as percent of GDP
5. Balancing budget will require 18% per-year in combination of spending cuts and revenue increases

The tax and spending implications of this report are significant. Here are few of the effects I predict:
1. Reduced state spending on education and other government services
2. Wage stagnation for state and local employees
3. Modification of employee retirement plans away from pensions
4. Expansion of sales tax to more services and rate increases
5. Legislation forcing e-commerce companies to collect sales tax
6. Reduction in state tax credits and incentives
7. Modification of corporate income tax structure
8. Increased enforcement activities to generate revenue

The GAO report is eye-opening. It reveals that without immediate and somewhat dramatic changes to spending and revenue, the state and local government fiscal outlook is rather bleak. Changing the ObamaCare provisions for Medicaid could also change the long-term spending curve, but who knows if that will happen!

State revenue agencies are not waiting for the legislatures to act. They are increasing collections and changing regulations to increase revenue. Now is the time for your clients to look at these issues and assess their risk. Sales tax continues to perplex many companies and this is creating a real and significant risk for these companies.

Ned Lenhart, CPA